Best Cities to Buy Rental Properties

Ever thought about becoming a landlord? Now might just be the perfect time, especially if you live in one of these cities.

A combination of beaten down home prices and rising rents make these cities promising places to become a landlord -- just as long as you understand the risks involved. (For example, landlords have been sued for discrimination against vets and sticking tenants in haunted houses.)

Home prices in Sin City are still greatly depressed -- down 62% from the 2006 peak, according to the S&P/Case-Shiller home price index -- making for some great bargains for investors. Meanwhile, rents continue to climb, according to a recent report from HomeVestors based on analysis by Local Market Monitor.

Of the 316 markets Local Market Monitor reviewed, Las Vegas ranked number one based on estimated returns on investment for single-family rental properties.

Cities were ranked by estimated future returns investors can expect when they buy single-family homes and rent them out. According to Local Market Monitor's data, for example, investors in Las Vegas will have a 5.6 percentage-point higher return on a rental property than the national average of 5%.

But there are risks with investing in cities like Vegas. The markets with the highest ratings are typically those where home prices have plunged the most, said Ingo Winzer, founder of Local Market Monitor.

And in Vegas, investors are buying up so many properties and turning them into rental properties that there is a glut in supply, said Winzer. In some cases, that could make it hard to find tenants. And letting a property sit vacant could take a big bite out of profits since an empty place can pile up expenses quickly, he said.

It's hard to imagine that home prices could get any cheaper in Detroit.

Hit hard by the auto industry's financial troubles and the housing bust, median home prices in the area have been cut almost in half to $78,000 from a 2004 high of $157,000, according to the National Association of Home Builders (NAHB).

And with rents on the rise -- up 5% over the past 12 months, according to Rent Jungle -- these beaten down home prices have created a nice opportunity for investors.

Even better, renters' incomes have become more stable. The auto industry has started down the road to recovery, giving a nice boost to the local economy. The metro area unemployment rate has fallen by 2.4 percentage points over the 12 months ended in April to 8.7%.

Winzer figures investors will earn 4.6-percentage-point higher return than the national average over the next three years.

In a market like Daytona Beach, where the median home price is down to $91,000, most homes are very affordable. But many locals still aren't buying.

"By and large, single-family homes are not priced beyond the reach of renters," said Winzer. But bad credit histories, often due to past mortgage payment problems brought on by Florida's severe housing bust, have made it difficult for many local residents to get mortgages, forcing many to rent.

For real estate investors, that means there's plenty of demand.

And the risks associated with renting in the area, which was hit hard by the housing bust and recession, have also started to subside. Unemployment dropped by 1.9 percentage points to 8.7% over the past 12 months.

Even with the lingering economic issues in the area, there's a lot of potential reward, according to Winzer. The estimated return for landlords in Daytona is about four percentage points higher than the national; average, according to HomeVestors.

Landlords in Orlando have been seeing a nice return on investment recently. Rents in the metro area rose about 7% over the 12 months ended in March, according to Rent Jungle, as homeowners displaced by foreclosure sought rental properties.

For those looking to buy in this market, properties are pretty affordable: Home prices are down to levels not seen since 2000, according to data from NAHB.

With Orlando's economy on the mend, the risks for investors are fairly low, said Winzer. Orlando's unemployment rate has come into close alignment with the national average, standing at 8.2% in April.

Plus, the metro area population continues to expand, rising 1.5% in the 12 months ended July 1, 2011, sparking more demand for rental housing.

Phoenix has become an investor's market, with many of the city's properties being turned into rentals to house those displaced after the housing bubble collapsed.

Demand for rental properties in the area has helped rents climb by about 7% over the past two years, according to Rent Jungle.

Also on the rise is the local economy. "Phoenix is doing much better than I thought it would," he said Winzer. "The economy has recovered nicely, growing 2.2% over the past 12 months."

But for investors, the best time to act may be sooner rather than later. Housing inventory in Phoenix has shrunk and home prices are on the rise. During the first three months of the year, home prices were more than 5% higher than they were in the year-ago period.

Unlike most of the other cities on this list, Reno's market is more popular for investors looking to buy vacation -- rather than residential -- properties.

"Reno is much more of a second home market for people from Northern California," said Winzer.

As such, it tends to reflect the market trends of cities within an easy drive, including Sacramento, San Jose, and, especially San Francisco.

But while Reno's status as a major vacation destination can be attractive to investors, it can also be a risk.

"Vacation home markets tend to be volatile," said Winzer. The prices may track the trends of coastal markets but the swings can be much greater.

One saving grace for investors, however, is that home prices are much lower in Reno than they are in other major cities. At a median of $137,000, Reno homes sell for about a quarter the price of San Francisco real estate. And rents should bring in above average returns, about 2.5% percentage points higher than the nation as a whole.

For investors, Tampa seems like a perfect place to buy a rental property.

At a median price of $100,000, homes are relatively cheap. And rents are on the rise, having gained about 4% over the 12 months ended in March, according to Rent Jungle. In addition, the economy is on the upswing, with a recent uptick in job growth.

However, there are some risks that real estate investors should be aware of, according to Winzer.

One problem: An abundance of shadow inventory of homes in foreclosure that are already repossessed and vacant but have yet to come on the market. When they do go on sale, they could push home prices even lower but also make it more difficult to find tenants.